Despite evidence last year that equity volatility was falling, credit spreads narrowing and higher-risk assets booming, high-net-worth investors (HNWIs) remained cautious. They have learnt hard lessons about risk and return over the past 12 months, according to Enid Yip, chief executive for Asia at Sarasin Rabo Investment Management. 'Investors are looking more closely at counterparty risk, concentration risk - diversifying their holdings, both by instrument and region - and more active currency planning to deal with potential currency risk/appreciation across Asia,' she says. A greater appreciation of the many facets of risk is one of several effects the global financial crisis has had on HNWIs. Their newfound prudence is reflected in a yearning to better understand investment products, a requirement for greater transparency in what they are being offered and a search for simpler products, such as equities and bonds. As a gauge of this simpler approach, investment activity at the beginning of last year resumed on the back of simple equity and fixed-income investments, according to Michael Benz, head of products and services at UBS Wealth Management, Asia Pacific. But with what seemed like a recovery under way, clients moved into more diversified products and there was a noticeable appetite for simple structured products, such as equity linked notes. 'But in general, the risk appetite is smaller than it was prior to the financial crisis, and investment behaviour has also changed,' Benz says. 'Clients expect more professional advice, a proper view on the investment, then the most appropriate products. The advisory process now has to happen in a better-structured investment framework with the client in control.' This cautious approach was vindicated by an end to the bounce-back in the first half of last year, signalled by the sharp rebound in the Chicago Board Options Exchange Volatility Index (VIX) in October to levels not seen since the first quarter. As a result, HNWIs are continuing to take a more back-to-basics approach towards their portfolios, only slowly reinvesting the cash holdings they built up at the start of the year. One key indicator of this swing towards safer assets is the amount invested in exchange-traded funds (ETFs) globally. ETFs are passive products typically used by investors to track markets rather than outperform them. According to Strategic Insight Simfund Global, from January 1 to June 30 last year ETFs globally recorded inflows of US$49 billion compared with US$5.3 billion flowing into active funds. This means that investors are investing more in passive funds than in active funds and confirms the trend seen in 2008 when ETFs recorded inflows of US$270.4 billion, compared with US$122.6 billion flowing into active funds. 'It emphasises the success of passive products in the past years,' says Marco Montanari, head of db x-trackers ETFs in Asia for Deutsche Bank. 'This is huge, especially when you consider that ETFs assets under management are much smaller than active funds - about 4 per cent of total assets managed by active funds. 'Retail and institutional investors are leaving money markets and cash products to take higher risks in terms of asset class exposure, but they are doing it increasingly through passive products like ETFs.' This guarded approach has also been seen among HSBC Personal Financial Services clients - those with between HK$1 million and US$3 million in assets. Direct investments in bonds issued by familiar companies, both global and local, and bond funds are proving popular investments. Last year, bond funds accounted for close to 50 per cent of fund sales for the top-selling funds compared to 2008, when equity funds accounted for the majority, according to Bruno Lee, HSBC's head of wealth management for Asia-Pacific. With high-yield bond indices such as the JP Morgan Global High Yield Bond Index and HSBC Asian Bond Index showing a stronger performance last year of 59 per cent and 25 per cent, respectively, it is not hard to understand why some HNWIs have been looking to bond funds for yield. But since bond prices rose significantly last year, reflecting investors' expectations of improving economies, investors should take a much more cautious and realistic view of potential performance in bonds or bond funds this year, Lee says. History suggests that such defensive portfolio positioning may well reverse rapidly as the yield on nominal assets falls back to more average single-digit returns and the appeal of real assets continues to outshine, a fact that is acknowledged by many wealth managers. According to Sarasin's Yip, for example, there is now a gradual but determined shift from cash- and bond-related assets into core equity and real estate holdings. 'These are designed to protect against real 'inflation-based risk' rather than nominal capital risk,' she says. 'In Hong Kong, we are already seeing certain economic factors combine to drive the property market substantially higher.' Marc Saffon, managing director and head of financial engineering for Asia- Pacific at Societe Generale in Hong Kong, also noted a growing appetite for more yielding products and diversified exposure as the level of yield on cash bonds had continued to decline dramatically since the beginning of the year. 'We see a growing appetite for risky investments in equities, with the ratio of equities in a typical individual portfolio increasing over the past three to six months,' he says. 'The underlying assets are mainly local, as usual, plus some US equities. 'We also see a growing appetite for diversification in the commodities space, mainly gold and oil, and some plays on emerging countries' currencies, like the Korean won, Brazilian real and Indonesian rupiah.'
